Despite Chinese policymakers’ conservative nature, the skew is surely for a bigger move on Monday, and further cuts and wider easing in the months ahead. The risk here would be to the currency, which is already extremely weak and vulnerable.
Economists are slashing their Chinese GDP growth forecasts and many doubt Beijing will meet its 2023 goal of 5.0%. Deflation, slumping trade activity and an imploding property sector are the familiar and increasingly serious risks.
Not only is the real estate crisis a threat to growth in its own right – the sector is a huge part of the economy – but the scale of indebtedness raises questions over the strength and stability of the $3 trillion shadow banking system.
Beijing is taking steps to bolster confidence, but so far these measures seem no more than tinkering around the edges. Chinese blue chip stocks are down 6% in the last two weeks, and financial conditions are the tightest since early December, according to Goldman.
China’s problems coincide with a deteriorating global backdrop. The dollar is surging, U.S. Treasury yields are breaking to new multi-year highs, and stock markets around the world are finally getting vertigo.
Much of that is perhaps being exaggerated by the seasonally thin market conditions of August. Either way, investors will be looking to Beijing and Jackson Hole this week for some degree of assurance and guidance.
